Not everything is lost for NBFCs; large players comfortable on liquidity front

COVID-19 continues to rattle the economy and business of all sectors and India’s financial space is expected to be among the worst hit by the pandemic, exerting immense pressure on their liquidity.

However, experts believe that large NBFCs are comfortable on liquidity front in the near-term.

In a report on April 27, brokerage firm Motilal Oswal Financial Services said large NBFCs looks comfortably placed with liquidity on their balance sheet to meet the fixed obligation and liability repayment for 3-6 months.

Besides, the brokerage highlighted that the RBI’s TLTRO and additional facilities from banks and support lines from their parent company is likely to provide additional cushion.

While large NBFCs appear to be capable to endure the COVID crisis, Motilal Oswal believes small and mid-sized NBFCs are likely to benefit from the refinance offered by NABARD, SIDBI, NHB, etc., even though the risk
aversion from the banking system remains high for small and mid-sized players.

“Some form of credit guarantee from the RBI/government or continued liquidity support to NABARD, SIDBI, and NHB may also help in terms of improving fund flow to this segment,” Motilal Oswal said.

The IL&FS crisis and subsequent events such as issues with DHFL and some other NBFCs triggered some sort of the behavioural change in the NBFC segment. Those changes are now expected to help NBFCs sustain at this juncture of uncertainty.

Motilal Oswal points out that given the headwinds faced by the sector over the last 18 months, NBFCs have focused on strengthening their balance sheets by improving liability and ALM (asset-liability management) structure, moderating growth and reducing leverage.

“While all this has led to lower profitability and RoEs, it has kept NBFCs in a good state in the current environment. For most companies under our coverage, cash and cash equivalents are 8-10 percent of the AUM against 4-5 percent in FY18,” Motilal Oswal said.

There is no doubt that there is unusual uncertainty now and the road ahead looks hazy, but it is unlikely that the large NBFCs will soon a situation of collapse in the near-term.

The RBI has been prompt in addressing the issues of the financial sector so far. For instance, RBI opened a special liquidity facility for mutual funds of Rs 50,000 crore after the collapse of six debt schemes of Franklin Templeton India.

The RBI’s measure was aimed at building confidence among investors and ensuring stability in the mutual fund industry.

In the near-to-medium term with growth likely taking a back seat, NBFCs and HFCs are expected to focus on liquidity and risk management as key priorities.

With some normalcy returning, Motilal Oswal expects securitisation or assignment transactions to likely pick up first from a funding perspective.

Normalcy will return to this sector in the second half of FY21, but that will depend on the functioning of the engine of the economy.